New SEC Climate Disclosure Rule: Impact on Carbon Markets and Companies

Unlocking the Climate Secrets of Companies: A Comprehensive Guide to the SEC's Mandatory ESG Disclosure Requirements for Investors and Stakeholders.

1. Introduction to the new SEC proposal

2. Overview of The Information Companies Need to Submit Alongside Their Financial Reports

3. Implication on Carbon Markets and Carbon Credit Pricing

4. Inflation Reduction Act Paves Way for Increased Incentives and Investment in Carbon Markets

5. Conclusion

Introduction to The New SEC Proposal

The Securities and Exchange Commission (SEC) has recently proposed a new rule that would require registrants to include specific climate-related disclosures in their registration statements and periodic reports. The proposal would require companies to disclose information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. Additionally, the rule would require companies to disclose their greenhouse gas emissions, a commonly used metric to assess a company's exposure to climate-related risks. The proposed rule changes would also include disclosing information like relevant risk management processes, as well as how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements. This information may manifest over the short-, medium-, or long-term.

Overview of The Information Companies Need to Submit Alongside Their Financial Reports

Under the proposed rules, companies would be required to disclose their direct greenhouse gas emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). They would also need to disclose greenhouse gas emissions from upstream and downstream activities in their value chain (Scope 3), if material or if the company has set a greenhouse gas emissions target or goal that includes Scope 3 emissions.

Companies would also need to provide answers to the SEC's version of the Task Force on Climate-Related Financial Disclosures' (TCFD) questions, which are expected to be very similar. They would need to include an intensity factor, which is dividing total emissions by a fixed business metric like revenue or number of employees to give an apples-to-apples figure. Finally, companies would need to disclose any internal carbon price used and the logic used to calculate it, and update their plans and progress against any public climate pledges or targets.

For companies that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants' climate risk management.

The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed rule changes would also include a phase-in period for all registrants, with the compliance date dependent on the registrant's filer status, and an additional phase-in period for Scope 3 emissions disclosure. Accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors.

(The SEC’s most recent rules on who is considered a large or accelerated filer can be found here)

Implication on Carbon Markets and Carbon Credit Pricing

This proposal has significant implications for carbon markets, as it would provide investors with consistent and comparable information for making investment decisions. Investors representing trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about these risks to make informed investment decisions. By providing investors with more comprehensive and comparable information about companies' exposure to climate risks, the rule could prompt them to re-evaluate their investment decisions, potentially leading to a shift towards low-carbon or carbon-neutral investments.

Increased demand for low-carbon or carbon-neutral investments could lead to a corresponding increase in demand for carbon credits. Carbon credits are tradable certificates that represent a reduction or removal of one metric ton of carbon dioxide equivalent from the atmosphere, and they can be purchased by companies seeking to offset their own greenhouse gas emissions. In terms of supply, the proposal could also have an impact as companies may have to reduce their emissions, resulting in decreased supply of carbon credits. This could drive up the price of carbon credits as demand outstrips supply.

The introduction of more regulation in the carbon credit market is expected to lead to a contraction of the supply of carbon credits. This is because the new regulations are likely to eliminate greenwashing and prevent companies from claiming to be carbon neutral without actually reducing their emissions. This will lead to a smaller supply of genuine carbon credits, which could drive up the price of credits. Additionally, the process of generating carbon credits can take time, which may constrain the supply of credits even further. If demand for carbon credits increases, this could lead to an even greater scarcity of credits and higher prices.

If demand for carbon credits does increase, it could drive up the price of these credits, which are typically priced based on supply and demand dynamics. Higher demand for carbon credits could result in an increase in their price, which would in turn make it more expensive for companies to offset their greenhouse gas emissions. This could create incentives for companies to reduce their own emissions rather than relying on offsetting through carbon credits, which would help to drive down overall greenhouse gas emissions.

Inflation Reduction Act Paves Way for Increased Incentives and Investment in Carbon Markets

he Inflation Reduction Act (IRA) of 2022 is set to significantly impact carbon markets. The law intends to reduce US carbon emissions by 40% by 2030 and achieve a net-zero economy by 2050 through a $369 billion investment in climate and energy. In addition to supporting renewable projects, the IRA updates the tax credit located in Section 45Q of the Internal Revenue Code. These updates incentivize the use of carbon capture, utilization, and storage (CCUS) technology and increase the credit values for qualifying technologies. This will encourage more businesses to adopt CCUS technology, leading to increased supply of carbon credits in the voluntary carbon markets. The updates also allow 45Q credit recipients to transfer credit value to third-party tax-paying entities in exchange for a cash payment, further incentivizing participation in carbon markets. The IRA's positive impact on reducing emissions and promoting renewable energy could lead to significant growth and expansion of carbon markets in the coming years.

Conclusion

In recent years, there has been a growing push for companies to disclose their greenhouse gas emissions and climate-related risks as investors increasingly consider these factors in their decision-making. As part of this trend, the US Securities and Exchange Commission (SEC) has proposed that public companies disclose information on their climate-related risks and opportunities, including answers to the TCFD's questions, greenhouse gas emissions, intensity factor, internal carbon price, and progress against climate targets.

The proposal aims to help investors make more informed decisions and support the transition to a low-carbon economy. If approved, this new regulation will likely lead to a contraction in carbon credit supply, as companies will be required to provide more detailed and accurate information on their carbon emissions, eliminating greenwashing and driving the demand for legitimate carbon credits.

Carbon credits already take time to generate, so this could lead to a constrained supply that can be overpowered by more demand. However, there is hope that the recently passed Inflation Reduction Act (IRA) will help increase the supply of carbon credits by incentivizing the use of carbon capture, utilization, and storage technology, potentially leading to increased trading in the voluntary carbon markets. With the SEC proposal and the IRA, it's clear that the US government is taking an increasingly active role in incentivizing and regulating carbon markets, signaling a shift towards a more sustainable and low-carbon economy.